The severity of the current crisis means airlines are once again looking to their staff for cost savings, something which could lead to a fundamental shift in the labour cycle
So this is how it is supposed to work. Economy grows, airline makes money, unions negotiate higher wages, economy slumps, airline loses money, unions offer concessions to airline, airline stops losing money, economy booms, airline makes money again, union wins back concessions. And so it goes on.
But has something changed? The move from economic gains to pains has been far faster and deeper than anyone imagined and the worst in living memory. Across the industry carriers are cutting costs everywhere. And this is not about short-term fixes. This is about permanent, structural change.
Labour is a natural starting place, mainly because it is a big cost item and because there is always more to do. It is also one of the hardest nuts for management to crack. Outgoing Finnair chief executive Jukka Hienonen, who quit recently after the carrier disclosed first half losses, hit out at unions for the slow pace of reform, saying achieving the necessary flexibility in labour costs has proved difficult.
"The reason lies in the working conditions agreed in the 'good times', whose realignment to the present situation simply seems impossible," he said. "Some personnel organisations have shown no willingness to adapt." Sound familiar?
CONCESSIONS NOT WON BACK
But from the labour perspective it hardly seems two minutes since the last time management came knocking on the door for concessions in 2001. Some of those concessions have been recovered, but definitely not all of them, says Gabriel Mocho Rodriguez, civil aviation secretary of global union body the International Transport Federation.
So although wages and conditions haven't snapped back by any measure to pre-2001 levels, unions have been agitating for the ground to be made up. Now the slump means the likelihood is they never will be.
In theory big opportunities still remain for labour cost savings at European network carriers. "If you compare the unit costs of network carriers and the low-cost operators, or European network carriers with the Middle East network airlines, there hypothetically remains potential for cost cutting," says London-based RBS analyst Andrew Lobbenburg. "But the extent to which it can be negotiated remains to be seen."
And it looks like something else has changed in the labour cycle between contract gains and concessions. The pressure from low-cost carriers means those network players facing strong low-cost competition cannot carry extra fat in their labour costs, even during the good times. Even a repositioned carrier like Aer Lingus, with Ryanair for company, has appeared to seldom been out of talks with its unions in its bid to control costs. In the latest round of negotiations, unions have said the struggling carrier has now told them it needs to find another €130 million ($186 million) in savings.
Beating budget carriers at their own game, costs, is probably a fool's errand for full-service network carriers given budget operators are generally unhindered by legacy labour deals. Consultant and academic Rigas Doganis notes: "Employee salaries for many network carriers are not significantly higher than those of low-cost carriers. The big difference is labour productivity.
"The problem facing all network carriers [in reducing labour costs] is they can't achieve the same level of productivity because of the demands of operating a hub and spoke model focussed on connecting traffic and different cabin classes. The network model imposes many constraints on labour productivity, including on cabin and flight crew. Most of these constraints do not apply to the low-cost model."
A recent study of US carriers performed by Oliver Wyman suggested the unit cost gap between the network and low-cost players has in fact widened, rather than getting narrower. Certainly the ever-bullish Ryanair thinks so, and is suitably dismissive of network carrier efforts to cut costs.
"I can recall every two to three years a strategy to cut costs [from network carriers]," says Ryanair deputy chief executive and chief financial officer Howard Millar. "But they never do anything. Our average cost per passenger was just over €40. Nobody is closing the gap. If anything it is widening."
But whatever the business model, management must not shirk choosing the hard route on labour. This environment is the best chance in a generation to reshape labour productivity and flexibility and rebase labour costs.
The chance must not be missed. Success would put the industry on a sensible footing not only in today's market, but the market that emerges when the recovery begins. Failure will see the same old cycle restarting once again.
See our recent report on the current state of the crisis facing the airline sector at:
flightglobal.com/rankings08
Source: Airline Business
